“If an institution is too big to fail, it is too big to exist. We should break them up so they are no longer in a position to bring down the entire economy.”

-Senator Bernie Sanders, (I, Vt)

“It’s the natural action of capital to grow and exceed. Now we’re going to contain it.”
-Representative Paul Kanjorski

>

Everyone this weekend was so busy watching the Health care bill, that they might have overlooked the most important financial reform legislation since the Commodities Future Modernization Act: A bill is gaining ground in Congress that would “break-up” big banks.

Independent U.S. senator Bernie Sanders has introduced the Volcker Plan. It gives the government the power to identify and break up financial firms that are “too big to fail.”

“In the aftermath of the worst financial crisis in decades, nations are trying to determine what to do about banks and financial firms that are so large that their failure could threaten the stability of the global financial system.

The goal is to prevent another debacle like last year’s when Lehman Brothers collapsed, triggering a credit crisis and huge taxpayer bailouts of AIG (AIG.N), Citigroup (C.N), Bank of America (BAC.N) and others . . .

Another approach, which Sanders and others back, would be to prevent the firms from getting so big in the first place. Sanders’ legislation would give Treasury Secretary Timothy Geithner 90 days to list commercial banks, investment banks, hedge funds and insurers that he deems too big to fail.

The bill defines that as “any entity that has grown so large that its failure would have a catastrophic effect on the stability of either the financial system or the United States economy without substantial government assistance.” It would give a new government systemic risk council break-up power, with clearance from the president.

Larger banks are expected lobby aggressively against it — but mid-sized and smaller financial institutions might be supportive. The bailouts have created an oligopoly, which makes it challenging for the smaller banks to market themselves.

The regional banks — the ones that are not TBTF — could find a more level playing field in which they could better compete in the market place, if this bill becomes law. Currently, they are at an enormous disadvantage versus the government subsidized giants . . .

To address the concept of ‘‘Too Big To Fail’’ with respect to certain financial entities.

IN THE SENATE OF THE UNITED STATES
Mr. SANDERS introduced the following bill; which was read twice and referred to the Committee on A BILL

To address the concept of ‘‘Too Big To Fail’’ with respect to certain financial entities.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Too Big to Fail, Too Big to Exist Act’’.

SEC. 2. REPORT TO CONGRESS ON INSTITUTIONS THAT ARE TOO BIG TO FAIL.
Notwithstanding any other provision of law, not later than 90 days after the date of enactment of this Act, the Secretary of the Treasury shall submit to Congress a list of all commercial banks, investment banks, hedge funds, and insurance companies that the Secretary believes are too big to fail (in this Act referred to as the ‘‘Too Big
to Fail List’’).

SEC. 3. BREAKING-UP TOO BIG TO FAIL INSTITUTIONS.
Notwithstanding any other provision of law, beginning 1 year after the date of enactment of this Act, the Secretary of the Treasury shall break up entities included on the Too Big To Fail List, so that their failure would no longer cause a catastrophic effect on the United States
or global economy without a taxpayer bailout.

SEC. 4. DEFINITION.
For purposes of this Act, the term ‘‘Too Big to Fail’’ means any entity that has grown so large that its failure would have a catastrophic effect on the stability of either
the financial system or the United States economy without substantial Government assistance.

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

58 Responses to “Senate Bill Would Break-Up TBTF Banks”

It is quite ironic that the most socialist member of Congress is proposing the most important piece of legislation needed to restore faith in capitalism.

It this bill passes it will have a profound effect on restoring confidence in our institutions. It is truly a free market solution. Break up the oligopolies and let smaller, more nimble and more competitive players into the market, doing what they do best.

Any bank that must charge 30% interest on a product where their own cost of capital is free, has failed. Period. End of discussion. They should be broken up and if many of the pieces do not survive, so be it.

Let the processes of creative destruction work as they are intended. Restore true capitalism and tear down the artificial barriers that are continuing to wreck havoc on our economy.

Obama, tear down these barriers!

It is quite ironic that the most socialist member of Congress is proposing the most important piece of legislation needed to restore faith in capitalism.

@Mannwich: No, except he “believes”, kinda like his predecessor, that it’s neat to be president. You get to ride in some really cool conveyances! And he “believes” in his ability to bullshit his way out of anything, and if that doesn’t work, he’s always got half-blackness to fall back on.

But I dither. Here’s the deal about all banks: They are quasi-government agencies. They manage the money. Guess where the money comes from? The only one that HAS to be too big to fail is the central one. All the rest can crash and burn all day. BUT, If the central bank/federal governmnet is going to be on the hook for when all these quasi-gov-agency banks fail (which is really what TBTF means), instead of their shareholders and depositors, then the central bank/federal government should make them as small and risk averse as is necessary to protect the taxpayer’s hide.

We have a financial structure in place right now that could lend to small businesses and individuals at reasonable rates if properly capitalized. They are called Credit Unions.

The big banks would howl, “it is not fair, they are non-profits, we cannot compete.”

Well, the big banks had their chance and they blew it. Further they do not seem to object to life being unfair when they triple the interest rates on existing credit balances.

At least as a temporary measure, why cannot the feds find a way to pump capital into the credit unions and provide a alternative means of providing access to reasonably priced credit to consumers and small businesses?

The banks either can not do this or will not do this because they now so dominate the market that they can get away with usurious interest rates and outrageous fees.

@Mannwich: Comments like that are niether topical, productive or useful, reagrdless of your political conviction.

I think this is really encouraging news. It will be interesting to watch if a grass roots movement germinates around Sanders. I’m sure we can all do our part to review the legislation and provide our feedback.

As a related tangent did anyone see poor old Gordon Browne crash and burn at the G20 with his (in my opinion hilariously absurd/insulting) Global Bank Bailout Tax? Thankfully the US/Canada were quick and blunt in thier dismissal of the idea and the rest appear to have fallen in line rather quickly.

“Any bank that must charge 30% interest on a product where their own cost of capital is free, has failed. Period. End of discussion. They should be broken up and if many of the pieces do not survive, so be it.”

And I totally agree on credit unions. I learned in the 80s, and have used nothing but credit unions ever since. There’s no need for anyone to put their personal money into these big banks who do nothing but abuse our trust.

Unless Obama and the Democrats do something about the Big Banks and the Outlandish Wall Street bonuses, they are going to have their heads handed to them in next November’s elections – since the economy is not going to stage a miraculous V-shaped recovery.

I am sure Obama and the democrats know this. So there will be some (mostly token) legislation that will pass. But somehow Goldman Sachs will not be on the list of banks to breakup. Neither will JP Morgan or Morgan Stanley. Some Tier 2/Tier 3 players will be broken up and the Administration will declare victory.

Your comments are quite topical. If the President of the United States is too timid to press for the changes that need to be made, then we have a problem. I voted for the O-man and I share your perceptions of what we got today as opposed to what we were hoping to be getting. A great orator and a great fund raiser does not make one a great leader.

Notwithstanding or sitting the above by Gatsby, there is supposed to be a number in the universe that is lower than zero. That’s about the chance of ANY such proposal passing, ever. Not until the entire financial structure has been hit by an asteroid, stray comet, or a jihadist takes down 85 Broad.

And yes TheBamster has beliefs and convictions. If you want to know what they are just overlay Lord Blankfein’s, and even moreso, Jamie Dimon’s and there you have it. Goldman Sucks, and JPM are behind the health care-less programs as well (since they’ll never have to worry about being in them.).

This would certainly be a quicker method than trying to use the Sherman act. That act needs to be modernized. Has it ever been modified since 1890 to deal with all the lawyered up incorporated entities that hide behind all the outdated existing laws? As part of the law they should make Credit Unions more easily established, allow them access to the same sources of capital at the same costs that the TBTFs’ currently enjoy.

cheapskate Says: “So there will be some (mostly token) legislation that will pass. ”

Cheap, I don’t think that this will be the case. Here is my reasoning:

This is where the blogosphere has been playing a very important role. With the ability of a BR or ZH to analyze and separate the wheat from the dung (its far worse that chaff), the politicians are much less able to conduct business in secret or to pull the wool over the eyes of the public.

Further, many MSM journalists read blogs and I am certain their reporting is appropriately influenced when an astute analysis is presented. Heck, how many times have we seen BR quoted by the MSM?

Times are a changing and the members of the political process may not yet get this to its full extent, but now someone (in fact many) are watching over their shoulders and tokenism will not cut it.

In fact, tokenism will only serve to further feed the flames of discontent with our institutions and disgust with our elected officials. It would be a dangerous path for them to take.

“The chief executive of Goldman Sachs, which has attracted widespread media attention over the size of its staff bonuses, believes banks serve a social purpose and are doing “God’s work”.”

..Wouldn’t this be sort of like the Italians passing a law that kicks the Pope out of the Vatican?

…just wondering…I am reminded of the movie Patton where George C. Scott asks the clergyman for good weather so he can kill Germans. Good weather ensues and Patton feels this particular clergyman has a good feel for God. I am wondering if GS feels like Moses or maybe even higher….

“The bill defines that as “any entity that has grown so large that its failure would have a catastrophic effect on the stability of either the financial system or the United States economy without substantial government assistance.”

Thanks Mann, that means that I still naively believe in the inherent goodness of mankind. It’s not too rational I know, but it was the way I was raised.

The next time the BR posts CR’s spaghetti model that compares percentage job losses from the current recession with those of the ten prior recessions, think of each of the boxes on the graph (the ones that are located between the graphed recession line and the horizontal axes line at zero) as a “box of distress” or a “box of hardship”. Then visualize the number of distress boxes that we will have before this episode is over and compare this with the number of boxes from previous recessions. Then you get a good perspective of the relative degree of economic distress that people are experiencing now and will experience over the next 2,3,4 years. (as if just looking at the line itself isn’t enough) Since this graph is on a percentage basis, it is fully comparable and not effected by population growth. Just a thought.

“For purposes of this Act, the term ‘‘Too Big to Fail’’ means any entity that has grown so large that its failure would have a catastrophic effect on the stability of eitherthe financial system or the United States economy without substantial Government assistance.”

Too bad the State of California probably wont apply to this standard. And neither will the Social Security ‘lockbox’ nor any other federal government backstopped program already subsidized and underfunded (PBGC, I’m looking in your general direction). Do they plan to address the interconnectivity of institutions in this bill? Apparently Bear, Wachovia and ML were TBTF but Lehman and AIG weren’t. Could any of these politicians explain why?

@bsneath: How are the two related? I think you can believe in Congress’ arrogance and cluelessness but still believe in the inherent goodness of mankind. Congress is its own little bubble. They seem to ignore popular sentiment or at least blissfully unaware of it, based on their actions in recent years.

you make a fine point, esp. re: PGBC, in general, and the 100′s of State, Local, and other, ‘Pension Funds that are, still, woefully underfunded..

to say nothing of the multitudes of States that are ‘balancing’ their Budgets on the back of ARRA

“Vallejo, a working-class community of 120,000 northeast of San Francisco, has long been a strong union town. Like many cities, it gives its workers generous retirement benefits: Police and firefighters can retire as young as age 50 with a pension equal to 90 percent of their final salary, and they enjoy free health care for life. Salaries, which serve as the base for determining pension levels, have also been generous: Forty-four percent of the city’s 613 employees had gross wages in excess of $100,000 in 2008.
Financing such largesse isn’t easy in the best of times. But in the midst of the worst economic downturn since the Great Depression, such salaries and benefits are becoming unsustainable. So facing an $8 million budget deficit and nearly $200 million in unfunded pension and health care liabilities, Vallejo filed for bankruptcy in May 2008, making it the largest governmental…”http://www.iimagazine.com/InstitutionalInvestor/Articles/2230301/The_Big_Public_Pension_Squeeze.html

The United States itself, all 5o of ‘em, has grown TBTF if it’s Treasury has grown TBTF.

The U.S. is too large, way too diverse, and spread over too wide an area to be even remotely governable. The hubristic, fascist attempts to govern it are pathetic, grossly unjust, and venally corrupt beyond all comprehension.

Break it up if there is to be any meaningful governance.

Breaking up the banks that have placed themselve for purely personal financial gain of the Lord Blankfeins, Dick Fulds, Angelo Mozillos, Joe Cassanos, etc. at the expense of the entire country and rigid control of our destiny, then the U.S. itself has about as much chance of being dismantled and reassembled.

Most telling may be the fact that this legislation was not proposed by either a Democrat or a Republican. Both major parties are too wedded to campaign contributions, lobbyists and special interests to waste their time considering the general interest. The big picture doesn’t provide them with the big rewards.

Look no further for evidence that Congress continues to detach themselves from their constituents than the climate and health care bills. While the under/unemployment rate closes on 20% or put more plainly 1 of every 5 Americans, the White House is busy spinning dismal economic reports into positive news while Congress fights a steel cage death match to pursue their ideological ends. The 3 top priorities for Americans right now is a Jobs, Jobs and Jobs. The Republicans got thrown out in part because of the economy and the Democrats are plainly showing that getting the country back to work is a lower priority than passing their social programs. Stupid is as stupid does and the American people won’t forget so easily this time.

@ call me ahab: “who put you in charge?” – fair enough, I may have come off a little curt which is my mistake.

I suppose we are all exhausted of the absurdity of AIG, Paulson, Blankenfien, Fuld (the list goes on, and on, and on) and the best way to keep from going mad is to be cyncical. But this is a glimmer of hope and reason that we can cling on to for just a brief time. It’s easy to be cynical and dismissive and it’s tough to take a risk and try to do something. Mannwich clearly has and that’s awesome.

I guess I was just hoping to at least a few posts before that easy cynicism that keeps us all going kick in which probably makes me a sucker.

You’re right. Glimmers of hope are for suckers. They want you to occasionally at least think they’re doing something to benefit you. Sucker.

I’m w/ flipspiceland. The best way to resolve this problem of TBTF, and Social Security, and Medicare/Medicaid, and Health Insurance Reform, and PBGC, and etc., is to split this ungovernable country up. It’d take a revolution, but at least one of its founders (Jefferson) observed that the need for revolutions come with a clockwork regularity, as governments always grow to excess over time.

WASHINGTON (AP) — Banks expect to tighten terms on credit cards in response to a new law that aims to protect consumers from sudden rate hikes, the Federal Reserve said Monday. A quarterly survey by the Fed found that many banks expect to increase rates, reduce credit limits and raise annual fees for both prime borrowers — those with sound credit histories –as well as more risky “non-prime” borrowers, who have tarnished credit. Banks also expected to raise minimum credit scores for non-prime borrowers, the Fed said.

If we the taxpayer allow ourselves to continually be violated by banks and their corporatist sycophants in government, can we really complain about it? I’m still trying to figure out who the whores are in this case, the banks, or us…. Sadly, I am leaning towards us, because we are sure getting f*cked, and I don’t mean in a good way.

This is pathetic. Rather than bring back something specific, such as Glass Stegall, this bill promises to introduce something subjective. The one thing this bill is guaranteed to do is to bring untold millions to Senate members from lobbyists. Hell, maybe that’s its real intent. Again, pathetic.

here’s a little more on the GMAC story–apparently even with boatloads of our cash being shoved at them, they still are losing money. The longer at the trough, the less the correlation between getting government money and losing it privately is accidental. Pretty soon, they’ll be actually trying to lose money, just so they can get some more. Which will probably mean they’ll start making it, because that’s how stupid they are. Anyhow:

Nov. 9 (Bloomberg) — The Federal Reserve said nine of 10 bank holding companies deemed short of capital in May have raised their reserves enough to withstand the risk of higher unemployment and slower economic growth.

I think it is unpatriotic for anybody to do business with an institution that gets money from the Fed at no interest, and then turn around and charge hard-working americans 30%. If you give your business to that kind of scum you are a traitor.

To me this whole TBTF legislation is stupid. Demand the immediate repayment of all taxpayer money now and cut off all current life support systems. Sink or swim. Let the investors take their losses. It’ll hurt but we will come out better for it, in the long run. And never, ever do this shit again in the future.

I wrote over the weekend that this was a great chance for the politicians to pass a very important bipartisan piece of legislation. On what other issue can folks from The Big Picture and Huffington Post agree?

I want to know what the arguments are for having institutions that are too big to fail. What are the benefits? And if there are benefits, do those benefits outweigh the hazards?

I said it on Saturday. I think the XLF will look much different in a few years.

It will take nothing less than this to ever regain my confidence in our financial system and our sense of what is right and wrong in this Country. Stealing from future generations is down right unethical and this crowd does not even flinch when it does it. How low must one be to shamelessly steal from their own children?

They are all thieves who are playing by a different set of rules; which, I still don’t understand why that is the case. Fiduciary responsibility? What a fucking joke!!

Let me politiely say that Kanjorski might be being more than a bit disingenous here. This is the same guy that throttled the FASB’s throat to change FV accounting for Q1 09 earnings so all the big banks did not have take any writedowns, and could go back to mark to make believe.

Secondly, we know that the big banks are too tightly coupled and interconnected to break up these banks. Lawmakers might be better served shrinking the size of the OTC debt and derivatives markets. Make those markets smaller, and the banks themselves would shrink to a size that would not be TBTF or TOO DIFFICULT TO RESOLVE TDTR

I hope you all agree with me in supporting breaking up of the other TBTFight INDUSTRIES
… if we’re all going to gang up on the banks .. after the super-banks;
the super-retailers; the super-insurances; the super-medias; and the super-manufacturer conglomerates

the desire/need/greed to “be the only super-one” .. is not in any consumers best interest … and those other teams attempting to play in the world series … competition is good … greed and cap’ism rules not so good

Too Big To Fail, as defined by any central government, seems to have far more in common with fascism than free enterprise and classic capitalism. To help those at the bottom who fail is humane; to help those at the top who fail is inane.

at 9:32pm – I didn’t spend many bytes backing up my point .. my observation of M&As between semi-super-corps the action is about (lets put a hot name in here for stories sake / chessymac & cremeeggs *) removing a slightly lesser organization of competition and in doing so looking more super for pulling the deed off
.. and the prices of both stocks start moving giving a segment of the herd 4 possible plays ( ^^ – vv – ^v – v^ ) (observant types in this unbelievable system we have can/will pull off some plays) juice (thats another story “turn those machines back on”)
.. but invaribly when the play doesn’t go totally in favor of both – the new VCs of the M&Ad – cut labor – close factories .. many times that is all in the strategy to pay for the play .. the number crunchers (all in a days pay) figure in profits & losses so taxes that would have been paidout** are now losses or breakeven – and another TBTFight is not given any strength ie The Big Gov …. I could remind TBPers of another play in here (beavers and dams / but to many story lines open)

.. beyond all that above (& having both the * wiki pages open and breezed)(which I will not post because we’re talking TBP here) my mind is reeling with commonfolk and governments and this cabal and that cabal and false flag operations and plain old greed & need
..
and that is why I dislike this system of allowing the big fish to eat the smaller fish (is this the cannibal thread) .. job losses – less taxes paid – empty factories – empty factory towns – price fixing – more power to control The Big G ….. sounds like our real ocean .. we need balance not uncontrolled greed
.. when/what – corporate organization large enough to produce product on a mass scale for a good price while heeding the need of the community it grew up in .. and small enough to enforce caring for the environment (nature) (like the saying I heard here at TBP – “when you owe the bank $10K its your problem – when you owe the bank $10B its the banks problem”

* sounds good don’t it … you got peanut butter on my chocolate / no you got chocolate on my peanut butter
** another coda point – are dividends out performing? or is most growth these days in stock price alone

Break them up into small bits. Big banks are still run by men with small minds, just like small banks, so don’t let them get big because screw up are always going to come. It did work fairly well for 50 years though.

The only caveat would be to remember, a bunch of small banks would have sold their mortgages to Wall Street too, which would have then securitized them and still have done the same thing. The weakness is in the human greed. The weakness is in lack of oversight. The weakness is in hollowed out government agencies b/c who needs them in an Ayn Rand world?

There were many pieces to this broken puzzle. Smaller banks would be a good start. Flushing all the Greenspan, and Ayn Rand cult out of career D.C. positions would be another. Glass-Steagel type law reintro another.

Oh, and if you can’t wait for someone to solve this one…take action on your own. Chances are you are banking with one of the “big ones”… Take some time and move your banking relationship to a smaller local bank. You can type all you want, but money/deposits talk.

Say Hello

About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

Quote of the Day

"Misers aren't fun to live with, but they make wonderful ancestors." -David Brenner

Sign Up For My Newsletter

Get subscriber only insights and news delivered by Barry every two weeks.